Put Fiscal Responsibility and Budget Management Act on hold to push growth, States tell FM

New Delhi: The states on Monday said the Centre should consider using the escape clause to monetise its fiscal deficit to support the pandemic-hit economy.
The states pitched for an extension of the goods and service tax compensation cess mechanism for five years beyond 2022 and that it be ratified in the upcoming Union Budget.

The suggestions were among several made by the states in the customary pre-budget discussions with Finance Minister Nirmala Sitharaman.

“The possibility of using all support measures, including the escape clause, should be placed on the table for consideration,” said one state finance minister, asking not to be identified.
Some states were in favour of the Centre invoking the escape clause in the FRBM law that allows the Reserve Bank of India (RBI) to subscribe to Central government loans. This, the minister said, will engender confidence that the government will do what it takes to sustain growth and thereby build a virtuous cycle.

India’s economy is expected to contract 7.7% in the current financial year, according to official estimates.

Experts have suggested that the government look at deficit monetisation to boost spending and revive growth.

Another suggestion was that borrowing of up to 5% of GDP should be permitted in 2021-22 as well to enable states to sustain their expenditure on capital works and on Covid-19 prevention measures.

“No abrupt fiscal correction should be attempted during 2021-22… the transition back to fiscal targets should be a gradual glide path over two to three years,” said a minister from a southern state.


Larger Share in Taxes
The states also wanted the Centre to merge cesses and surcharges into the basic rate of tax so that they also receive their due share from the additional revenue.

All the states sought the Centre’s intervention in clearing outstanding dues stemming from lower devolution to the states and GST in FY 2020-21.

One minister suggested that devolution of further taxation powers to the states be discussed in the GST Council to ensure that the states are not put to hardship, a person familiar with the deliberations said.

On Monday, the Centre issued the 12th instalment of Rs 6,000 crore to states as a back-to-back loan to meet the compensation shortfall in collection of GST, taking the total amount released so far through the special borrowing window to Rs 72,000 crore.